A project has projected sales of 25,600 units with a selling price of $4.95 each. Annual ﬁxed costs are $31,000 with variable costs of $2.18 per unit. The project has a three-year life and requires an
Initial investment of $62,900 for equipment. The equipment will be depreciated straight-line to zero
Over three years. The sales price has a plus-minus range of 10% while the cost estimates are
Expected to vary within a 5% range. The quantity has a plus-minus range of 8%. The tax rate is 34%.
Under the best-case scenario, what is the operating cash ﬂow?
A) $22,268
B) $28,292
C) $42,867
D) $43,235
E) $49,259

Question

Quizplus · Accepted Answer

First, we need to calculate the variable cost per unit with the given range provided:
Variable cost per unit= $2.18*(1-0.05)=$2.07
We also need to find the range of sales quantity:
Quantity range= 25,600*(1+0.08)= 27,648 units

Best case scenario:
Sales= 25,600*(1+0.1)= 28,160 units
Revenue= $4.95*28,160= $139,248
Variable costs= $2.07*28,160= $58,275.20
Contribution margin= $80,972.80

Total cost= $31,000+(2.18*25,600)= $85,568
Depreciation= $62,900/3= $20,966.67
EBIT= $80,972.80- $85,568- $20,966.67= -$25,562.87
Tax= 34%*($25,562.87)= $8,686.77

Operating cash flow= EBIT+Depreciation-Taxes= -$25,562.87+$20,966.67-$8,686.77= -$13,282.97

Therefore, the best choice for the operating cash flow is E) $49,259.

A Project Has Projected Sales of 25,600 Units with a Selling